Life Cycle Assessment solution Carbon Trail is now WBCSD PACT conformant!
Life Cycle Assessment solution Carbon Trail is now WBCSD PACT conformant!
Ashish Rohil
July 12, 2023
6 min read
Home » Blog » Blog » Blog » Life Cycle Assessment solution Carbon Trail is now WBCSD PACT conformant!
Last week, Carbon Trail became one of the first few Life Cycle Assessment solutions to be declared as PACT conformant. This implies that we adhere to the technical specifications published by the Partnership for Carbon Transparency, PACT which is the global standard for calculating and exchanging Scope 3 data across entire value chains. It has been developed by the World Business Council for Sustainable Development (WBCSD) with leading stakeholders from across the entire carbon ecosystem – leveraging its role as co-convenor of the Greenhouse Gas Protocol. This declaration of conformance acknowledges that Carbon Trail’s solution meets all technical specifications outlined by PACT’s Pathfinder framework and has been independently tested by at least two other PACT conformant solution providers.
We are proud to join the PACT vision with our mutual goal to enable our clients and their entire value chain to make smart, carbon-informed business decisions to deliver on climate commitments and reach net-zero.
Why is PACT important for fashion?
The fashion industry is under increasing pressure to decarbonize but struggles to get access to primary data and create transparency on emissions across the value chain (Scope 3). PACT is resolving this challenge by developing the global methodological and technological infrastructure needed for product-level emission accounting and exchange. The Pathfinder framework establishes clear guidance for carbon accounting along value chains, supporting organizations in securely sharing their emissions data with their downstream partners.
Amongst all sustainability-related information, Product Carbon Footprints (PCFs) are emerging as the most important in the fashion industry. In an earlier blog, we covered several use cases including how Product Carbon Footprints (PCFs) can solve Scope 3 accounting in Fashion Industry. The capability to interconnect with other solutions and exchange product footprint data, in a standardized format, is essential for helping stakeholders in the fashion value chain exchange and use sustainability data for GHG accounting.
Major issues with environmental footprinting in fashion today
1. Lack of standardization in data exchange between parties
A common concern in the fashion industry has been the lack of standardization in the emission data exchange format between stakeholders, leading to the proliferation of several company-specific data collection spreadsheets. These quickly become unwieldy as the number of suppliers increases.
2. Inaccurate allocation of primary facility data leading to overcounting or undercounting of Scope 3 emissions
Today, brands allocate emissions from their supplier’s facilities purely based on the amount of volume they purchased during that year without considering the diversity in products produced by the facility during the same period. This leads to severe over or undercounting of emissions. Some brands inaccurately allocate the aggregated Scope 1 and 2 emissions of their suppliers to their own Scope 3 emissions accounting which further exacerbates the problem as suppliers have facilities creating different products using different sets of processes. We covered this issue with examples in another post earlier.
3. Data confidentiality concerns among suppliers
There’s a growing concern among textile manufacturers and export houses that are supplying multiple global brands and retailers about the amount of information they’re sharing about their operations with buyers. Information about the facility’s total production quantity, resource consumption, and man-hours can potentially disclose the entire facility cost structure, enabling brands and retailers to negotiate and further squeeze margins in the fashion supply chain.
How is PACT solving these issues?
1. Global framework
The Pathfinder framework leverages and builds on existing methods and standards for the calculation and allocation of product-level emissions, including:
● Product Life Cycle Assessment and Reporting Standard (GHG Product Standard) and Corporate Value Chain (Scope 3) Standard by WBCSD and World Resources Institute under the GHG Protocol
● ISO standards for Life Cycle assessment (LCA) (14044/40, 14067)
● Product Environmental Footprint (PEF) and Product Environmental Footprint Category Rules (PEFCRs) by the European Commission
2. Data standardization
PACT helps companies exchange PCF information using the same standardized technical language with the aim of simplifying the collection and use of shared data. The technical specifications of the Pathfinder framework include:
● A data model to exchange PCF information between systems, which defines which data elements must be shared and in what format.
● The data quality or primary data share of footprints, bringing transparency to the accuracy of the emissions information provided.
● Information related to the assurance and verification of the PCF, providing the necessary confidence to trust the data.
Though the Pathfinder framework specification is industry-agnostic, its data model can be extended to include any data that is unique to the fashion industry or product type. A PACT conformant solution can standardize the fashion sustainability data exchange across different parties, enabling data transparency and collaboration.
3. Allocation
PACT recommends avoiding allocation by disaggregating the textile manufacturing processes into sub-processes specific to the studied product and using primary emissions data specific to those processes. When avoiding allocation is not possible, PACT recommends using allocation methods as per industry-specific Product Category Rules (PCRs) such as the upcoming PEFCR for Apparel and Footwear.
4. Data confidentiality and sovereignty
The Pathfinder framework allows data owners the flexibility to exchange data at different levels of granularity with access rights controls and the ability to approve each PCF exchange.
How Carbon Trail conforms to PACT
Carbon Trail works with each player in the fashion supply chain (i.e., retailer, brand, trader/supplier, and manufacturer) to help them automatically measure their environmental footprint. Carbon Trail’s platform seamlessly integrates with any ERP data system like SAP, PLM software like Centric, facility energy data collection tools like Enablon, e-commerce platforms like Shopify, and even Excel spreadsheets, and then applies machine learning algorithms to automatically extract useful information for measuring environmental footprints.
Carbon Trail’s platform creates PCFs that can be automatically shared with any other 3rd party tool, or internal tools, that fashion companies use through standardized APIs. This could be from manufacturer to brand or brand to retailer or between different tiers of manufacturers.
Finally, for companies lacking technical talent, Carbon Trail can also help align their existing GHG accounting systems to receive PCF data from Carbon Trail’s platform thus making onboarding simpler and eliminating the need for any customized spreadsheets.
By becoming a PACT conformant solution, Carbon Trail becomes the only fashion-specific Life Cycle Assessment and carbon accounting solution so far with the capability to interconnect with other solutions in a standardized and secure manner. By onboarding to the Carbon Trail platform, fashion companies can now save the valuable time they spend in collecting and standardizing data from manufacturers and focus on what’s important – cutting down carbon and getting to net-zero.
Expertise in LCA, supply chain traceability, decarbonization strategy & implementation with prior experience in developing a net-zero roadmap for fashion and retail customers.
Paul Polman, former CEO of Unilever and co-founder of Imagine, in an interview with HBR, said, “Companies are starting to understand that you need to be restorative, reparative, regenerative.” With increased awareness of climate change, sustainability, or corporate inequality, there is growing accountability and transparency from companies on environmental and social impact.
Stats on CSR Impact
Hence, for companies to disclose their actions supporting the environment, a crucial regulatory framework called the Corporate Sustainability Reporting Directive (CSRD has been adopted in Europe. This framework allows companies to be more honest and open regarding their sustainability efforts. It was put forward by the European Commission under the European Green Deal in 2019 to strengthen corporate liability. But what exactly is the CSRD, and how should fashion brands and retailers prepare to comply with it?
What Is The Corporate Sustainability Reporting Directive?
Implemented by the European Union, the Corporate Sustainability Reporting Directive (CSRD) aims to standardize, enhance, and modernize sustainability reporting among companies. CSRD replaces the Non-Financial Reporting Directive (NFRD), offering stakeholders more uniform, analogous, and trustworthy data on environmental, social, and governance (ESG) issues.
With the introduction of the new CSRD, the scope and scale of sustainability reporting bring in uniform, obligatory reporting criteria at the EU level. The number of companies mandated to report on sustainability will rise from 11,600 under the NFRD to about 49,000.
The history of CSRD
One thing that sets CSRD apart from NFRD is the type of information covered. While NFRD reports the standard environmental, social, and governance information, CSRD goes beyond by giving additional details like forward-looking insights, double materiality, alignment with the EU taxonomy, etc.
CSRD Applicability And Timeline
The scope for mandatory sustainability reporting by CSRD is extended to larger and listed companies regulated in EU markets, except micro-enterprises. By “larger companies” it means fulfilling two out of the three criteria, i.e., having a net turnover of over 50 million with 250+ employees and over €25 million worth of assets. Other small and medium-sized enterprises listed on the regulated market also encompass the same, but with a longer phase-in period and simplified reporting standards.
CSRD Timeline
April 21, 2021 - The European Commission approves the proposal for CSRD to replace the NFRD.
June 2022 - The European Commission and the Council reach a provisional agreement on the CSRD.
November 2023 - EFRAG publishes the first set of European Sustainability Reporting Standards (ESRS).
January 1, 2024 - The CSRD comes into effect, focusing on large public-interest entities with over 500 employees for FY 2024 reporting in 2025.
January 1, 2025 - The CSRD is also subjected to large companies not currently subject to NFRD, with reporting for FY 2025 in 2026.
January 1, 2026 - The CSRD is extended to listed SMEs, small and non-complex credit institutions, and captive insurance undertakings, with reporting for FY 2026 in 2027.
January 1, 2027 - SMEs can opt out until 2028, with the start of full compliance for all applicable entities.
January 1, 2028 - SMEs that opted out can begin reporting and complete the phased implementation of CSRD.
CSRD Requirements
Companies must present comprehensive reports on ESG concerns, including specific targets and metrics. For detailed reporting standards, companies must invest in robust data collection and management systems that involve hiring trained personnel in sustainability reporting, training staff, upgrading IT systems, etc. CSRD further emphasizes governance and accountability by requiring the company’s board of directors to get actively involved to ensure the accuracy of these reports.
Our RFP guide for carbon accounting and LCA covers a comprehensive list of parameters that companies must consider in evaluating software platforms and getting compliance ready for CSRD and other EU regulations.
European Sustainability Reporting Standards (ESRS)
The Corporate Sustainability Reporting Directive includes certain mandatory requirements, providing a structured approach for companies to comply with for their sustainability reporting. These requirements are called European Sustainability Reporting Standards (ESRS). It was developed by the European Financial Reporting Advisory Group (EFRAG) and was adopted in June 2023. Apart from topical requirements, it consists of cross-cutting standards like ESRS 1 - General Principles and ESRS 2 - General Disclosure.
Requirements for sustainability reporting
ESRS 1 General Requirements
Under ESRS 1, a crucial concept is the Double Materiality Assessment. It demands that sustainability reporting must take place from two prospects :
1. Impact Materiality
Preliminary impact materiality helps companies assess the scope, scale, and remediability of their impact on the environment, economy, and people. To calculate Preliminary impact materiality, companies should first measure the Scope of impact, Scale of impact, and Remediability.
Scope Of Impact
The range of the impact across various areas or stakeholders and should be measured on the following scale:
5 global/total
4 widespread
3 medium
2 concentrated
1 limited
0 none
Scale Of Impact
The intensity of the impact and should be measured on the following scale:
5 absolute
4 high
3 medium
2 low
1 minimal
0 none
Remediability
The extent to which the impact can be mitigated and should be measured on the following scale:
5 non-remediable/irreversible
4 very difficult to remedy or long-term
3 difficult to remedy or mid-term
2 remediable with effort (time & cost)
1 relatively easy to remedy short-term
0 very easy to remedy
Preliminary Impact Materiality = Scope of impact + Scale of impact + Remediability
Once calculated, the preliminary impact materiality should be described using the following table:
≥ 12 critical
[10,12) significant
[8,10) important
[5,8) informative
< 5 minimal
2. Financial Materiality
Financial materiality allows companies to evaluate how sustainability issues impact their value-generating ability over the short, medium, and long term, affecting financial position and performance.
Financial materiality should be described using the following results table:
4 critical
3 significant
2 important
1 informative
0 minimal
ESRS 2 General Disclosures
General Disclosure of ESRS 2 refers to the requirements demanding companies to disclose their information on the following aspects :
1. Governance
Provide details regarding how the company is managed on environmental and social policies. Companies must cover everything from board insights and stakeholder engagement to management structures and compliance mechanisms.
2. Strategy
This requires companies to detail their overall strategic approach towards pressing environmental and social issues and future methods like energy efficiency, resource conservation, diversity and inclusion efforts, etc. to achieve them.
3. Impacts, Risks, and Opportunities
Communicating the social and environmental impact of a company’s operations and the risks and opportunities involved. This includes data on emissions, labor practices, water usage, cost savings through sustainability initiatives, human rights issues, etc.
4. Metrics and Targets
Covers specific targets set by the company to assess and track performance in the social and environmental areas such as employee turnover rates, community investment spending, energy consumption, diversity statistics, etc.
After the mandatory requirements, companies must also understand the topical requirements and tailor their reports accordingly. Under the ESRS, these topical requirements encompass various environmental, social, and governance (ESG) issues.
ESRS Environmental Standards
These standards specify the requirements for environmental disclosure by the companies. Under this, many issues must be considered:
E1. Climate Change
Energy consumption, emission reduction targets, greenhouse gas emissions, risks related to climate change, and strategies to adapt to these risks.
E2. Pollution
Soil contamination, wastewater discharges, emissions of pollutants like SOx, NOx, VOCs, etc.
E3. Water
Marine and coastal ecosystems, water usage, and discharge, and information regarding the water sources.
E4. Biodiversity
Initiatives to restore ecosystems and company actions and policies for biodiversity protection.
E5. Resources and Circular Economy
Raw material consumption, renewable material usage, recycling rates, waste generation, circular economy principles, designing products with minimal environmental impact, and longer lifecycles.
ESRS Social Standards
Under the CSRD, the ESRS also specifies standards for disclosure related to social aspects of a company’s operations. Following are the requirements that fall under these aspects:
S1. Own Workforce
Average wages, wage equality, benefits, health measures, accidents, injuries, training programs, employee mental and physical health, policies to promote inclusion and diversity, etc.
S2. Workers In Value Chain Metrics
Forced labor, child labor, labor abuses, etc. along with the benefits provided like training and development opportunities, fair wages, working conditions, and hours for value-chain workers.
S3. Consumers And End-Users Metrics
Safety incidents, product recalls, marketing practices, consumer rights, product labeling, safety standards, data privacy, consumer awareness, etc.
S4. Affected Communities' Metrics
Local communities' concerns, investments to uplift them, jobs created, suppliers supported, setting up of grievance mechanisms, etc.
ESRS Governance Standards
Finally, the ESRS for governance-related sustainability reporting focuses on a company’s policies and practices related to risk management, ethics, integrity, and structure.
G1. Business Conduct
Covers policies like anti-bribery or anti-corruption, code of conduct, mechanisms for reporting unethical behavior or violation of the code of conduct, how it is dealt with, number of reports received, actions taken, outcomes, etc.
Additionally, it involves the composition and functioning of the board, its executive compensation, and stakeholder engagement. Risk management, including internal controls, audit, and compliance with the rules and regulations, are important to be vocal about with your audience.
Key Performance Indicators For ESRS
Companies must measure and monitor their sustainability performance to comply with CSRD. Key Performance Indicators (KPIs) are classified into environmental, social, and governance metrics under the CSRD and ESRS frameworks.
Environmental Metrics
Greenhouse gas emissions (Scope 1, Scope, and Scope 3), energy consumption (percentage of energy from renewable sources), water usage and withdrawal, waste generated, carbon pricing, carbon reduction, etc.
Social Metrics
Gender diversity (percentage of women in the workplace), number of accidents and fatalities, fair wages and working hours, average training hours per employee, employee satisfaction scores, labor standards, health and safety incidents among supply chain workers, data breaches, customer satisfaction, community consultations, etc.
Governance Metrics
Code of conduct violations, corruption incidents, board diversity, executive compensation, risk management, internal and external audits, fines for regulatory violations, etc.
CSRD Audit And Assurance
The reliability, credibility, and accuracy of sustainability reports are guaranteed through Audit and Assurance. The CSRD highlights the role of auditors and the significance of independent assurance in elevating the standards of these reports.
The auditor verifies data collection methods, ensuring the data is efficient and consistent with the brand’s operations and complies with standards like ESRS. Assessing how effective the internal controls related to sustainability reporting are, Auditors evaluate how the company predicts, manages, and mitigates risks. The role of an Auditor is to ensure that all aspects of ESG are covered in the sustainability report with no omissions and that all the data aligns perfectly with the financial and non-financial information.
Independent Assurance is also an important factor for the credibility and reliability of these reports, as investors depend on these assured reports for making decisions. These auditors provide an unbiased view of the report, with an objective assessment of a company’s performance. They ensure that the report aligns with the standards and practices, and their feedback can highlight areas for improvement.
CSRD - Potential Challenges
However, the overall audit process faces challenges like ensuring the accuracy of diverse ESG data and metrics. The need to keep up with the changing standards and regulations and various interpretations of these guidelines can provoke inconsistencies. Audit reporting requires expertise and training, which may not be available at every firm. Therefore, companies must use systems that allow them to report their data in an audit ready format.
Further, the auditing process can be costly and time-consuming for small companies with limited resources. During the audit reporting process, material assessment needs to be carefully considered, identifying ESG concerns. It is also critical to identify the scope and boundaries of the sustainability report, for example, which operations to include.
CSRD Timeline For Report Submission
Companies must submit these reports accurately and timely to maintain stakeholder trust and compliance. They must detail out the activities of the previous fiscal year and submit their reports annually. These reports can be combined with annual financial reports or can be submitted separately. Although every company has a specific deadline according to the country and regulatory standards, the report is to be submitted in the same timeframe as the financial report, a few weeks after the end of the financial year.
The timeline for audit and assurance typically begins a few months before the report submission, giving enough time for data verification and assurance tasks. They finish their review and provide feedback just in time to be included in the report.
Steps to prepare for CSRD reporting
Non-Compliance With CSRD
Companies that fail to comply with the Corporate Social Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS) related to the same may suffer significant losses, leading to financial, legal, or reputational troubles. Companies can be substantial fined by the regulatory bodies based on the duration and severity of non-compliance. They may also face higher audit and assurance costs if issues are found in the reports because additional rectifications may be required. Additionally, companies may get their credit ratings downgraded by the rating agencies, increasing borrowing costs.
Conclusion
The Corporate Social Reporting Directive (CSRD) is a major milestone in the industry of corporate sustainability. It mandates companies to disclose transparent and detailed information regarding their environmental, social, and governance (ESG) practices.
To ensure compliance, fashion brands and retailers must focus on robust internal controls, honest reporting practices, and rigorous data collection. Software platforms like Carbon Trail can help in automating carbon accounting, adding transparency in emission calculations, gaps filling, audit-ready reporting as per CSRD standards.
In the coming years, sustainability reporting is expected to get more thorough and rigorous. Companies must integrate sustainability into their core operations and become well-prepared for future regulations. By staying ahead of the game, businesses can enhance their ability to adapt, foster innovation, and make a positive impact on global sustainability goals and secure long-term success and sustainability.
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